Mergers and acquisitions (M&A) activity in the property/casualty (P&C) insurance industry declined in deal volume but witnessed an increase in average deal value in 2013, according to a report by research firm Frost & Sullivan.
Total transaction value declined by a compound annual growth rate (CAGR) of 15 percent between 2007 and 2012, while average transaction value also declined by a CAGR of 9 percent in the same period. The report, “Mergers and Acquisitions Trends in the Global Property and Casualty Insurance Industry,” says most of this decline can be attributed to unfavorable economic and political environment and the declining financial health (profitability, cash and capital reserves) of the global P&C insurance industry.
However, both total transaction value and average transaction value witnessed an increase of 30 percent and 61 percent for the nine months ended September 2013, in comparison with the same period in 2012.
Improved performance of the industry, renewed investor confidence, improved reserves and a beginning of the hard market cycle (increase in premiums) — complemented by a year with lesser catastrophic losses than the previous two years — have improved the prospects of merger activity in this space globally, the report says.
The study notes that P&C companies are focusing on greater capital efficiency and cash flow generation, seeking mergers in low-penetrated developing countries with a high growth potential to strengthen their distribution network in such countries.
North America continued to be the hub of merger activity in 2013, with a large proportion of domestic mergers and few outbound transactions in Latin America and the Caribbean and Europe. European P&C companies, on the other hand, are actively restructuring their business units across the globe and have been active in many outbound transactions, especially in the Middle East region.
While Africa and the Middle East has a huge growth potential in the P&C space, Frost & Sullivan says, a lack of transparency is hampering M&A activity. Asia Pacific, Latin America and the Caribbean feature domestic merger activity, where P&C insurers from developed countries seek to strengthen their distribution network in low penetrated countries within the region.
M&A in the P&C insurance industry define and shape the future structure of the industry, says the report, which covered the period from January 2007 to September 2013.
Merger activity drives revenue growth and industry consolidation and is affected by a variety of factors, the report says. These include profitability trends (improved underwriting performance by P&C companies in 2013); valuation trends (a narrowing valuation gap); market cycle; reserves and capital adequacy (increased reserves recorded in 2013 compared with the previous year); and regulatory and governance issues (restructuring of business units by several companies for regulatory compliance).
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